The hidden agenda in the so-called tax reform bill is to act as stop-gap quantitative easing to plug the ‘liquidity’ hole that is opening up as the Federal Reserve (America’s central bank) makes a few gestures to winding down its balance sheet and ‘normalizing’ interest rates. Thus, the aim of the tax bill is to prop up capital markets, and the apprehension of this lately is what keeps stocks making daily record highs. Okay, sorry, a lot to unpack there. Primer: quantitative easing (QE) is a the Federal Reserve’s weasel phrase for its practice of just creating ‘money’ out of thin air, which it uses to buy US Treasury bonds (and other stuff). The Fed buys this stuff through intermediary Too Big To Fail banks which allows them to cream off a cut and, theoretically, pump the ‘money’ into the economy. This ‘money’ is the ‘liquidity.’ As it happens, most of that money ends up in the capital markets. Stocks go up and up and bond yields stay ultra low with bond prices ultra high. What remains on the balance sheets are a shit-load of IOUs. The third round of QE was officially halted in 2014 in the USA. However, the world’s other main central banks acted in rotation – passing the baton of QE, like in a relay race – so that when the US slacked off, Japan, Britain, the European Central Bank, and the Bank of China, took over money-printing duties. And because money flies easily around the world via digital banking, a lot of that foreign money ended up in ‘sure-thing’ US capital markets (as well as their own ). Mega-tons of ‘money’ were created out of thin air around the world since the near-collapse of the system in 2008.

Authored by James Howard Kunstler via Kunstler.com, The hidden agenda in the so-called tax reform bill is to act as stop-gap quantitative easing to plug the ‘liquidity’ hole that is opening up as the Federal Reserve (America’s central bank) makes a few gestures to winding down its balance sheet and ‘normalizing’ interest rates. Thus, the aim of the tax bill is to prop up capital markets, and the apprehension of this lately is what keeps stocks making daily record highs. Okay, sorry, a lot to unpack there. Primer: quantitative easing (QE) is a the Federal Reserve’s weasel phrase for its practice of just creating ‘money’ out of thin air, which it uses to buy US Treasury bonds (and other stuff). The Fed buys this stuff through intermediary Too Big To Fail banks which allows them to cream off a cut and, theoretically, pump the ‘money’ into the economy. This ‘money’ is the ‘liquidity.’ As it happens, most of that money ends up in the capital markets. Stocks go up and up and bond yields stay ultra low with bond prices ultra high. What remains on the balance sheets are a shit-load of IOUs. The third round of QE was officially halted in 2014 in the USA. However, the world’s other main central banks acted in rotation – passing the baton of QE, like in a relay race – so that when the US slacked off, Japan, Britain, the European Central Bank, and the Bank of China, took over money-printing duties. And because money flies easily around the world via digital banking, a lot of that foreign money ended up in ‘sure-thing’ US capital markets (as well as their own ). Mega-tons of ‘money’ were created out of thin air around the world since the near-collapse of the system in 2008.

As I’ve been noting again, again, again, again, and again the macro backdrop is marching toward changes. I’d originally thought those changes would come about within the Q4 window and while that may still be the case, it can easily extend into the first half of 2018 based on new information and data points that have come in. One thing that has not changed is that stock sectors, commodities and the inflation-dependent risk ‘on’ trades and the gold sector, Treasury bonds and the risk ‘off’ trades are all keyed on the interest rate backdrop; and I am not talking about the Fed, with its measured Fed Funds increases. I am talking about long-term Treasury bond yields and yield relationships (i.e. the yield curve). People seem to prefer linear subjects like chart patterns, momentum indicators, Elliott Waves, fundamental stock picks or the various aspects of ‘the economy’ or the political backdrop. They want distinct, easy answers and if they can’t ascertain them themselves, they seek them out from ‘experts’. But all of that crap (and more) exists within an ecosystem called the macro market. When you get the macro right you then bore down and get investment right. That’s the ‘top down’ approach and I adhere to it like a market nerd on steroids. And with the recent decline in long-term bond yields and the end of week bounce, the preferred plan is still playing out. So let’s briefly update the bond market picture with respect to its implications for the stock market, commodities and gold.

Financial bubbles are the office Christmas parties of the investment world. They start slowly, with a certain amount of anxiety. But they end wildly, with acts and decisions that in retrospect seem really, really stupid. Millions of people out there still bear the psychic scars of buying gold at $800/oz in 1980 or a tech stock at 1,000 times earnings in 1999 or a Miami condo for $1,000 per square foot in 2006. Today’s bubble will leave some similar marks. But where those previous bubbles were narrowly focused on a single asset class, this one is so broad-based that the hangover is likely to be epic in both scope and cumulative embarrassment. This series will create a paper trail for the morning after, starting with a truly amazing anomaly: European junk bonds now yield less than US Treasury bonds.

Apparently Treasury Secretary, ex-Goldman Sachs banker Steven Mnuchin, has threatened Congress with stock crash if Congress didn’t pass a tax reform Bill. His reason is that the stock market surge since the election was based on the hopes of a big tax cut. This reminded me of 2008, when then-Treasury Secretary, former Goldman Sachs CEO, Henry Paulson, and Fed Chairman, Ben Bernanke, paraded in front of Congress and threatened a complete systemic collapse if Congress didn’t authorize an $800 billion bailout of the biggest banks. The U. S. financial system is experiencing an asset ‘bubble’ that is unprecedented in history. This is a bubble that has been fueled by an unprecedented amount of Central Bank money printing and credit creation. As you are well aware, the Fed printed more than $4 trillion dollars of currency that was used to buy Treasury bonds and mortgage securities. But it has also enabled an unprecedented amount of credit creation. This credit availability has further fueled the rampant inflation in asset prices – specifically stocks, bonds and housing, the price of which now exceeds the levels seen in 2008 right before the great financial crisis. However, you might not be aware that western Central Banks outside of the U. S. continue printing money that is being used to buy stocks and risky bonds. The Bank of Japan now owns more than 75% of that nation’s stock ETFs. The Swiss National Bank holds over $80 billion worth of U. S. stocks, $17 billion of which were purchased in 2017. The European Central Bank, in addition to buying member country sovereign-issued debt is now buying corporate bonds, some of which are non-investment grade.

Probably nothing… The last two times the spread between 30Y and 5Y Treasury bonds was below 90bps, the US economy entered recession… *** And the 2s10s curve is tumbling too – to its flattest since the crisis…

Recently, US Treasury bonds are like peanuts … investors can’t just eat one. Investors can’t get enough of the longest maturity U. S. bonds even with the Federal Reserve set to embark on its next step toward normalizing interest rates. While higher rates usually erode the value of long-dated debt more, expectations for only a gradual increase in yields and tepid inflation have investors such as pension funds seeking to put money to work in a low-return world. ‘There is still really, really strong demand for Treasury bonds out there,’ said Ben Emons, chief economist and head of credit portfolio management at Intellectus Partners. ‘There’s a mix of structural factors – from pension funds who remain underfunded – to global investors faced with low or negative yields abroad and given inflation is low. This would all be different if inflation was higher – but it’s not.’

I have made countless posts lampooning the mainstream media and its eyeball harvesting, click baiting content. This content and especially the associated headlines (let’s recall the classic R. I. P. Bond Bull Market as Charts Say Last Gasps Have Been Taken, dated Dec. 2016 as but one example) are designed to whip up emotions, draw attention and thereby gain traffic and ad dollars (diminishing though they are these days). nftrh.com is and always will be ad-free, by the way. So sure, the bond bull market may well have ended in the Brexit and NIRP dominated summer of anxiety (in fact I believe it did), but any good contrarian would have seen the trade setup to go bearish on bonds in the middle of that hysteria, not a half a year later when Bloomberg used Louis Yamada’s chart to make a big headline. From a post in June 2016 about the Silver/Gold ratio and the prospects for a future ‘inflation trade’ right at the height of the bond bull… ‘All of this as the world sits in Treasury bonds and global NIRP garbage. Perfect. More and more it is looking like Brexit may have been an exclamation point.’

In an echo of last week’s move following North Korea’s teating of missiles across Japan’s territory, futures markets are opening in a decidedly risk-off mannwr following North Korea’s “hydrogen bomb” test. Dow Futs down 100 points, Gold jumping and Treasury bonds bid… *** All major US equity indices are down…

The global risk-off mood accelerated overnight on Trump “stability concerns”, coupled with fallout from the Spain terrorist attack and lingering North Korea tensions, even if the VIX is off its latest highs, trading just above 15. Investors fled into German and U. S. Treasury bonds and bought gold for the third day in a row, as the appeal of such top-notch assets grew further due to a deadly attack that killed at least 13 people in Barcelona. “In a week where we started by worrying about nuclear war, markets have quickly moved on from this, with yesterday’s weak session more of a response to fears that Mr Trump’s strategy for the economy and business is falling apart and later the terrible terrorist attack in Barcelona,” is how DB’s Jim Reid summarized the week’s psychedelic events. Concerns that Trump’s stimulus is in peril spiked following speculation that his top economic advisor, former Goldman COO Gary Cohn, was set to resign roiled markets on Thursday until reports that he’d opted to stay on board steadied the ship, however heightened terror fears added to the risk off sentiment after at least 13 people died when a van plowed into pedestrians in Barcelona. The terror attack was a reminder of lingering geopolitical risks, with nerves still raw after last week’s escalation of tensions on the Korean peninsula.

World stock markets were mostly higher again Tuesday, on a further apparent de-escalation of the U. S. and North Korea stand-off regarding its nuclear missiles. North Korean news reports Tuesday said President Kim Jong Un has decided not to fire missiles at Guam. The U. S. secretary of defense and secretary of state, as well as other Trump administration officials, in recent days said they are trying to achieve denuclearization of North Korea through diplomacy. U. S. stock indexes are pointed toward higher openings when the New York day session begins. The safe-haven assets gold and U. S. Treasury bonds are seeing price pressure from the better risk appetite in the world marketplace so far this week. Gold prices are down about $11.00 an ounce in pre-U. S.-session trading Tuesday.

Every quarter, Apple manages to impress with its gargantuan cash hoard, which in Q2 rose to $262 billion (which however is $153 billion net of debt), a new all time high as shown in the chart below.

While it is widely known that of this $262 billion, the vast majority, or $246 billion is held offshore, what is less appreciated is that Apple’s actual cash is just $18.6 billion. The rest is held in various securities, both short- and long-term, something we first reported back in September when we introduced readers to Braeburn Capital, the firm that actually manages Apple’s quarter trillion in asset holdings. In the five years that have passed since then, Apple’s AUM have grown. Substantially. As the company reported in its latest 10Q, as of June 30, AAPL now owns enough assets to not only put even the world’s largest hedge fund, Bridgewater with less than $200Bn in assets to shame, but some of the world’s largest holders of Treasurys. Of its total $243 billion in Short and Long-Term securities, Apple owned a whopping $51.5 billion in Treasurys, split between $20.1 billion in T-Bills and $31.3 billion in Treasury Bonds.

The Chinese Govt is greatly irritated by the requirement to use USDollars in payment for crude oil in the global market. The Beijing officials finally have some leverage in arranging for a major deal to pay for crude oil in RMB currency, their Yuan. The negotiations have been in progress for a couple months. The development is not covered well in the financial press, not even in the alternative media. It will happen, just a matter of time. Its effect will be far reaching and likely devastating. The global currency reserve status for the USDollar is at severe heightened risk. It will not be deposed via financial markets, like with a bond market failure or a COMEX gold market default with bust. Such is folly to imagine as likely to occur. The Western bankers are expert at rigging the financial markets, one and all. Their central bank bond support has extended to stock market support, soon to corporate bond wide support also. The USGovt is hanging onto its power base in increased isolation. The assaults are on many flanks and platforms. ESSENCE OF PETRO-DOLLAR Its essence is the sale of crude oil universally in USDollar terms. Typically the payment form is the USTreasury Bill. The OPEC crew typically sock their surplus petro dollars in USTreasury Bonds. The sale proceeds never exit the USD form. The deal was struck in 1973 by the Rockefeller agent named Heinz Kissinger. It came in the wake of the abrogated Bretton Woods Gold Standard, which Nixon violated with force and audacity. In fact, the arrangement was suggested by the US side of the table. Nevermind that it was Rockefeller who hatched the idea of a tripled oil price, the exact opposite of what has been inscribed in the historical annals. The other little item in the Petro-Dollar defacto standard treaty is that the Saudis, along with the Gulf Arab neighbors, would buy USMilitary hardware exclusively. The USGovt would provide them with plenty of regional conflict. Over the four decades since, the Arabs have accumulated a few cool $trillion in USTBonds. The TIC Report on foreign bond assets is a gigantic fabrication. Most Saudi bond holdings have been hijacked and stolen, used as the core to the USDept Treasury’s vaunted Exchange Stabilization Fund. They will never see at least $3 trillion in sequestered bonds. A joke here, since the ESFund is the most secretive multi-$trillion fund in human history.

The King Dollar is mortally wounded. Many notice but the masses seem largely unaware. Since 1971, the Gold Standard has been removed from its anchor position. But since 1973, the Petro-Dollar has taken its place. It has called for crude oil sales led by the Saudis and OPEC to be transacted in USDollar terms, for oil surpluses to be stored in USTreasury Bonds, and for some kickbacks from the Saudis to the USMilitary complex for weapons purchases. Of course, the US is ready willing and able to create strife and to foment wars whereby the Arab oil monarchs will need more weapons. Since 2014, many events have pointed to the crippled condition of the important link between the USDollar and crude oil. The price has plunged by 50% of more, and not recovered. It is currently lurching in the nether bounds near the $45 level. Anything less than $65 to $70 per barrel is very dangerous for keeping the oil sovereigns afloat and for keeping the US energy sector solvent. Witness the Wall Street banks having tremendous problems with impaired bonds and toxic energy portfolios. They seem not resolvable. They cannot keep the oil price over $50, a sign of their impotence. Not enough financial analysts connect the new normal of a much lower crude oil price with the eventual vanishing act of the Petro-Dollar. The Wall Street banks are deeply exposed on their entire energy portfolios, which include both bonds and commercial loans. Tens of $billions will have to be written off as loss, beyond the $billions already declared as losses. These corrupt banks have worked their magic to lift the oil price above the $50 level, but failed. They worked the task for over a year, but failed. They need an oil price over $60, but failed. The Saudis did not help the cause, by their ongoing extra output to finance their filthy Yemen War. The Saudis earned the anger of their OPEC partners, especially the Gulf Arab allies. The Wall Street banks deeply resent the Saudis for this deed, but the USMilitary complex loves the Saudis. The other Arab oil producers also harbor consider rancor toward the Saudis, who really have no friends in the entire Persian Gulf region. They are so worthy of a palace coup, which would bring clamors of rejoicing in many corners of the West if it were to occur. The day might be close.

For your holiday listening pleasure, Jim Willie returns for a comprehensive discussion of the petrodollar and how current events around the Arabian Peninsula are a sign of great distress for this monetary scheme. Again, what is the “petrodollar”. The idea was championed by Henry Kissinger in 1973 as a way to create ongoing demand for US dollars by maintaining the pricing of crude oil in dollars only. The effects of this were two-fold: To create constant demand for dollars…dollars which were now completely unhinged from any gold backing…and this demand would soak up any excess supply of new currency being printed in the US for military and social purposes. To force oil-exporting nations to keep their foreign currency reserves in dollars, thus creating an ongoing demand for US treasury bonds. This constant demand for bonds would help to keep interest rates…and thus the US debt service cost…unnaturally low.

Authored by Chris Hamilton via Econimica blog, As the Fed is in the midst of a rate hike cycle, it seems important to remember why this cycle is like no previous rate hike cycle. The mechanics of this hiking cycle are completely unique and experimental…thus the outcome is far more of an unknown than “normal”. Why? In a typical cycle, the Fed would sell a relatively small portion of its assets…er, balance sheet (typically short duration bills and notes) to banks. This would withdraw some of banks liquid funds (replacing them with less liquid assets) and create “tightness”. This tightness would push overnight lending rates higher and the daisy chain of rising rates would work its way through from the shortest eventually all the way to the 30yr Treasury bonds. However, this time, nothing like that is happening. This is because the Fed sold all its short term notes/bills (in Operation Twist) and bought longer duration MBS (mortgage backed securities) and longer duration Treasuries in Quantitative Easing to the tune of $4.5 trillion. Further, since the Fed bought most of these assets from large banks, these banks held much of the proceeds from these sales at the FRB (Federal Reserve Bank). For the Fed to perform typical rate hikes, it would need to remove most of the $2.1 trillion banks are now sitting on in excess reserves @ the FRB…likely creating a crisis in the process. Conversely, if the Fed can’t contain the $2.1 trillion at the FRB, and the reserves are leveraged into the market…stand back in awe of the mother of all bubbles. Thus, the Fed has instead determined to raise rates via paying banks interest on these excess reserves to maintain the reserves at the Federal Reserve. In short, pay banks not to lend money, not to invest the reserves. This is just like Federal programs that paid farmers not to farm…IOER (interest on excess reserves) pays big bankers not to bank.

Via Global Macro Monitor blog, Lots of hand wringing these days about the flattening yield curve. We still maintain our position that the signal from the bond market is significantly distorted due to the global central bank intervention (QE) into the bond markets. See here and here. Most of what is happening with the U. S. yield curve is technical. Sure, traders can get a wild hair up their arse, believing the economy is slowing and try and game duration by punting in the cash or futures markets. Given the small relative float of the U. S. Treasury bond market, however, it doesn’t take much buying to move yields. In the words of economists, the supply curve of outstanding Treasuries is very inelastic. This is illustrated in the following chart. The combined market cap of just Apple and Amazon at today’s close is larger than the entire the float of outstanding Treasury notes and bonds that mature from 2027-2027. We define float (US$1.16 trillion) as total Treasury securities (2027-2047) outstanding (US$1.73 trillion) less Fed holdings (US$575 billion).

The target for TLT continues to be around 129. Treasury bonds are in bull trends (remember back a few months ago to all the bond hatred in the media). How does an eventual decline in bonds square with what we just noted above regarding Q4 2008? [work done in the preceding Precious Metals segment] Treasury bonds were a wonderfully bullish asset during Armageddon ’08 and who’s to say that an upside blow off may not be coming sooner rather than later amid massively over bullish sentiment? I mean, there is certainly no stop sign at our 129 target. Sentiment, as we are all too aware, can take a long while to manifest in pricing.

Mass Infusions of New Credit ‘The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it.’ – John Steinbeck, The Grapes of Wrath Something strange and somewhat senseless happened this week. On Tuesday, the price of gold jumped over $13 per ounce. This, in itself, is nothing too remarkable. However, at precisely the same time gold was jumping, the yield on the 10-Year Treasury note was slip sliding down to 2.15 percent. In short, investors were simultaneously anticipating inflation and deflation. Naturally, this is a gross oversimplification. But it does make the point that something peculiar is going on with these markets. Clear thinking and simple logic won’t make heads or tails of things. For example, late Wednesday and then into Thursday the reverse happened. Gold gave back practically all $13 per ounce it had gained on Tuesday, while the yield on the 10-Year Treasury note climbed back up to 2.19 percent. What to make of it? With a little imagination one can conceive of where the money’s coming from to buy Treasury bonds. More than likely, it has something to do with central bank intervention into credit markets. Though, the Federal Reserve is not the only culprit.